Cryptocurrency mining only profitable in China?

28 Jan 2019 13:40|Bartosz Grejner

"Bitcoin has dropped below the average cost of its mining meaning that some cryptocurrency miners may stop the activity, which has become unprofitable. This may cause an escalation of the downward trend and bring bitcoin’s price below 2,000 dollars," writes Bartosz Grejner, Conotoxia Analyst.

The cryptocurrency market suffers from a lack of positive stimuli. So it is not surprising that prices are falling. This puts a lot of pressure on cryptocurrency miners. According to the JPMorgan Chase analysis, the average cost needed to create one bitcoin was 4,060 USD in Q4 of last year. Today, the price of the biggest cryptocurrency fluctuates around 3,500 USD.

It is likely that such a price level will gradually decrease the number of people involved in this process, especially since there are currently no positive signs for cryptocurrencies. The drop in values puts into question the profitability of bitcoin mining in practically all regions of the world, with the exception of China, where the average cost of mining a bitcoin, according to the above analysis, was 2,400 USD. Chinese entities are able to cheaply buy energy, which is the main cost in the whole process of cryptocurrency mining.

If the miners with high costs leave the market, entities with low overheads will benefit. They will be able to create more bitcoins using the same amount of energy. According to JPMorgan Chase data, this could lead to a drop in costs for Chinese producers to just under 1,260 USD. Increased supply of cheaper bitcoins, in turn, may exert additional pressure on the price of the largest cryptocurrency, and therefore, also on the entire market in which the share of bitcoin still amounts to about 50%. Can the price of bitcoin fall to about 1,260 USD?

It is hard to determine such a scenario as unrealistic, if we analyse the price movements. From mid-December 2017 to the present day, the price has fallen from around 20,000 to 3,500 USD, i.e. by approximately 82%. Even if we reduce the period of one year to three months, the fall still seems enormous. Bitcoin’s value from mid-November 2018 to mid-December decreased from about 6,500 to 3,200 USD, i.e. by half. A drop in price below 2,000 USD, even in a month with unfavourable circumstances, cannot be ruled out.

The circumstances are undeniably unfavourable. The partial government shutdown in the US led to the withdrawal of the application to introduce bitcoin-based ETFs to trading on the US market. There were not enough people at SEC to analyse and then approve the application. Of course, the rejection could have been expected. In any case, there was information that will not help cryptocurrencies. Meanwhile, this market needs actions that will translate into a greater trust of both consumers and financial institutions. Without the introduction of regulations, prices of cryptocurrencies may continue to gradually depreciate.

28 Jan 2019 13:40|Bartosz Grejner

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